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45
Monetary Policy Rules Based on RealTime Data
 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FINANCE AND ECONOMICS DISCUSSION PAPER SERIES
, 1997
"... In recent years, simple policy rules have received attention as a means to a more transparent and effective monetary policy. Often, however, the analysis is based on unrealistic assumptions about the timeliness of data availability. This permits rule specifications that are not operational and ignor ..."
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Cited by 426 (18 self)
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In recent years, simple policy rules have received attention as a means to a more transparent and effective monetary policy. Often, however, the analysis is based on unrealistic assumptions about the timeliness of data availability. This permits rule specifications that are not operational and ignore difficulties associated with data revisions. This paper examines the magnitude of these informational problems using Taylor's rule as an example. First, I construct a database of current quarter estimates/forecasts of the quantities required by the rule based only on information available in real time. Using this data I reconstruct the policy recommendations which would have been obtained in real time. I demonstrate that the realtime policy recommendations differ considerably from those obtained with the ex post revised data. Withinyear revisions in the policy recommendations are also quite large with a standard deviation exceeding that of the quarterly change of the federal funds rate. Further, I show that estimated policy reaction functions obtained using the ex post revised data can yield misleading descriptions of historical policy. Using Federal Reserve sta forecasts I show that in the 19871992 period simple forwardlooking specifications describe policy better than comparable Taylortype specifications, a fact that is largely obscured when the analysis is based on the ex post revised data.
Robustness of simple monetary policy rules under model uncertainty
 MONETARY POLICY RULES
, 1999
"... In this paper, we investigate the properties of alternative monetary policy rules using four structural macroeconometric models: the FuhrerMoore model, Taylor’s MultiCountry Model, the MSR model of Orphanides and Wieland, and the FRB staff model. All four models incorporate the assumptions of rat ..."
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Cited by 244 (34 self)
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In this paper, we investigate the properties of alternative monetary policy rules using four structural macroeconometric models: the FuhrerMoore model, Taylor’s MultiCountry Model, the MSR model of Orphanides and Wieland, and the FRB staff model. All four models incorporate the assumptions of rational expectations, shortrun nominal inertia, and longrun monetary neutrality, but differ in many other respects (e.g., the dynamics of prices and real expenditures). We compute the outputinflation volatility frontier of each model for alternative specifications of the interest rate rule, subject to an upper bound on nominal interest rate volatility. Our analysis provides strong support for rules in which the firstdifference of the federal funds rate responds to the current output gap and the deviation of the oneyear average inflation rate from a specified target. In all four models, firstdifference rules perform much better than rules of the type proposed by Taylor (1993) and Henderson and McKibbin (1993),
Monetary Policy Evaluation with Noisy Information
, 1998
"... This paper investigates the implications of noisy information regarding the measurement of economic activity for the evaluation of monetary policy. A common implicit assumption in such evaluations is that policymakers observe the current state of the economy promptly and accurately and can therefore ..."
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Cited by 242 (29 self)
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This paper investigates the implications of noisy information regarding the measurement of economic activity for the evaluation of monetary policy. A common implicit assumption in such evaluations is that policymakers observe the current state of the economy promptly and accurately and can therefore adjust policy based on this information. However, in reality, decisions are made in real time when there is considerable uncertainty about the true state of affairs in the economy. Policy must be made with partial information. Using a simple model of the U.S. economy, I show that failing to account for the actual level of information noise in the historical data provides a seriously distorted picture of feasible macroeconomic outcomes and produces inefficient policy rules. Naive adoption of policies identified as efficient when such information noise is ignored results in macroeconomic performance worse than actual experience. When the noise content of the data is properly taken into account, policy reactions are cautious and less sensitive to the apparent imbalances in the unfiltered data. The resulting policy prescriptions reflect the recognition that excessively activist policy can increase rather than decrease economic instability.
Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero
 FINANCE AND ECONOMICS DISCUSSION SERIES, 9835, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
, 1998
"... This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s an ..."
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Cited by 112 (27 self)
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This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are nonlinear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. The stationary distribution of output is distorted with recessions becoming somewhat more frequent and longer lasting. Our model also uncovers that the asymmetry of the policy ineffectiveness induced by the zero bound generates a nonvertical longrun Phillips curve. Output falls increasingly short of potential with lower inflation targets. At zero average inflation, the output loss is in the order of 0.1 percentage points. We also investigate the consequences of the constraint on the analysis of optimal policy based on the inflationoutput variability frontier. We demonstrate that in the presence of the zero bound, the variability frontier is distorted as the inflation target approaches zero. As a result comparisons of alternative policy rules that ignore the zero bound can be seriously misleading.
Filardo (2007), “Globalisation and Inflation: New CrossCountry Evidence on the Global Determinants of Domestic Inflation,” unpublished paper, Bank for International Settlements
"... There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation fo ..."
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Cited by 103 (3 self)
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There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation for this phenomenon is that monetary policy has been much more effective. There is no doubt in our mind that this explanation goes a long way towards explaining the better inflation performance we have observed. In this paper, however, we begin to explore a complementary, rather than alternative, explanation. We argue that prevailing models of inflation are too “countrycentric”, in the sense that they fail to take sufficient account of the role of global factors in influencing the inflation process. The relevance of a more “globecentric ” approach is likely to have increased as the process of integration of the world economy has gathered momentum, a process commonly referred to as “globalisation”. In a large crosssection of countries, we find some rather striking prima facie evidence that this has indeed been the case. In particular, proxies for global economic slack add considerable explanatory power to traditional benchmark inflation rate equations, even allowing for the influence of traditional indicators of external influences on domestic inflation, such as import and oil prices. Moreover, the role of such global factors has been growing over time, especially since the 1990s. And in a number of cases, global factors appear to have supplanted the role of domestic measures of economic slack.
Monetary Policy and Uncertainty about the Natural Unemployment Rate
, 1998
"... Recent empirical research concerning the relationship between in ation and unemployment, a relationship that is central to the design of monetary policy, has been characterized by an active debate about the precision of relevant parameter estimates such as the estimated natural unemployment rate. Th ..."
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Cited by 70 (6 self)
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Recent empirical research concerning the relationship between in ation and unemployment, a relationship that is central to the design of monetary policy, has been characterized by an active debate about the precision of relevant parameter estimates such as the estimated natural unemployment rate. This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the shortrun in ationunemployment tradeo in a simple macroeconomic model. Two con icting motives drive the optimal policy. In the static version of the model, uncertainty provides a motive for the policymaker to move more cautiously than she would if she knew the true parameters. In the dynamic version, uncertainty also motivates an element of experimentation in policy. I nd that the optimal policy that balances the cautionary and activist motives typically exhibits gradualism, i.e. it is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty isvery high and in ation close to target.
A reliable and computationally efficient algorithm for imposing the saddle point property in dynamic models. Manuscript, Federal Reserve Board of Governors
"... linear saddle point models. The algorithm has proved useful in a wide array of applications including analyzing linear perfect foresight models, providing initial solutions and asymptotic constraints for nonlinear models. The algorithm solves linear problems with dozens of lags and leads and hundred ..."
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Cited by 39 (2 self)
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linear saddle point models. The algorithm has proved useful in a wide array of applications including analyzing linear perfect foresight models, providing initial solutions and asymptotic constraints for nonlinear models. The algorithm solves linear problems with dozens of lags and leads and hundreds of equations in seconds. The technique works well for both symbolic algebra and numerical computation. Although widely used at the Federal Reserve, few outside the central bank know about or have used the algorithm. This paper attempts to present the current algorithm in a more accessible format in the hope that economists outside the Federal Reserve may also nd it useful. In addition, over the years there have been undocumented changes in approach that have improved the eciency and reliability of algorithm. This paper describes the present state of development of this set of tools.
PRICE STABILITY AND MONETARY POLICY EFFECTIVENESS WHEN NOMINAL INTEREST RATES ARE BOUNDED AT ZERO
, 2003
"... This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s an ..."
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Cited by 32 (6 self)
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This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are nonlinear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. Also, we show that the asymmetry of the policy ineffectiveness induced by the zero bound generates a nonvertical longrun Phillips curve. Output falls increasingly short of potential with lower inflation targets.
Inflation Zone Targeting
 EUROPEAN ECONOMIC REVIEW
, 1999
"... We study optimal monetary policy design in a simple model that deviates from the linearquadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zonequadratic preferences or a zonelinear relationship between inflation and economic ..."
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Cited by 31 (4 self)
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We study optimal monetary policy design in a simple model that deviates from the linearquadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zonequadratic preferences or a zonelinear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies. We calibrate the model based on parameters for the U.S. and the Euro area and employ a numerical dynamic programming algorithm to derive the optimal policies. With this algorithm, we examine the role of uncertainty, model structure and relative preference towards economic stability in determining the width of the implied targeted inflation zone.